Hi, good morning. Good afternoon. This is Rahul Bajaj from the Citi Research team in Dubai. It is our pleasure to host Abu Dhabi Islamic Bank for their fourth quarter 2023 and FY 2023 earnings call this afternoon. From ADIB, to represent the management team, we have Mr. Mohamed Abdelbary, the Group CFO. We also have the Group Head of Investor Relations, Communications, and Marketing, Ms. Lamia Hariz, and Group Financial Controller, Mr. Ahsan Ahmed Akhtar. At this point, without further delay, I would like to pass on the call to the ADIB team for the opening remark. Over to you, Lamia.
Thank you, Rahul. Good afternoon to everyone on the call, and thank you for joining us today. Before we start, I just wanted to remind everyone that our Investor Relation part, as well as our financial disclosures, are all available on our corporate websites as well as the dedicated IR app. As Rahul has mentioned, I am here joined by Mr. Mohamed, our Group CFO, and Mr. Ahsan, our Group Financial Controller. The agenda of the day is like every quarter, we will start with the key highlight of the quarter and the full year, followed by an update on our strategy and a detailed analysis of our financial performance. Then we will give some guidance for 2024, and then we will open the room for some Q&As. With that, I will now hand it over to Mohamed to start the presentation. Mohamed.
Thank you, Lamia, and good morning and good afternoon, everyone, and thank you for joining us on today's call. We are very pleased to have reported yet another record-breaking set of results with net income for the year reaching AED 5.25 billion, which is an impressive increase of 45% year-on-year. This result was driven by strong revenue momentum, up 36% year-on-year, driven by broad-based revenue growth. Return equity in full year of 2023 expanded by 5.7 percentage points, reaching 27.1%. Given the strong results, the bank has proposed an attractive dividend of AED 0.71 per share, and this compares to AED 0.49 per share in the year of 2022. With that, I will move on to the next slide, and let's talk a bit about our strategy.
As you know, our strategy is informed by our purpose as a lifelong partner for customers, colleagues, and community, and our vision is to be the world's most innovative Islamic bank. The strategy is built on four key pillars, which I will expand on each of the next few slides. So on slide seven, we are showing the main pillars. If I start with continuous innovation. Innovation of new Sharia-compliant banking products is an area where we can differentiate our value proposition and gain a competitive advantage over our peers. Additionally, the bank is re-engineering delivery of products and services, and plans to launch innovative digital ventures and new business models. Finally, ADIB is building a market leading Islamic wealth management business and asset management proposition. Second pillar of our strategy, which is segment focus.
Under that specific pillar, ADIB's strategy is building on our existing strengths in the Emirati retail segment, while attracting and developing new business segments where the bank can grow profitably. In this regard, a core focus area includes the development of an ecosystem to support Emirati customers across all financial stages in their lives. Other focus areas include expanding customer proposition and product offering across SME, mid- and large- size corporate, improving cross-sell of products and service, and also building on our FI business. Our third pillar, digital excellence. Under digital excellence, it remains the heart of our strategy and the bank is becoming a digital first financial institution. ADIB aims to elevate customer convenience through its digital platform and become a data-driven organization by leveraging advanced analytics and artificial intelligence.
At the same time, we're building a modern technology stack and new digital tools and capabilities for staff to enable seamless digital processing and frontline delivery. Last but not least, sustainable future. ADIB is embedding sustainability and ESG into our existing Islamic banking DNA. Here we are also focusing heavily on optimizing, growing, and developing our human capital, reinforcing the risk and compliance culture, and optimizing our digital technology foundation. Also, under continuous innovation, Amwali is one of our key pillars and, over 6,600 new Amwali accounts have been opened in the year of 2023. Okay, also I'm going to call out a few of our financial performance highlights, if we can move to that, Lamia. Yeah?
As mentioned in my opening remarks, we're excited to see continuation of strong growth momentum by delivering 45% growth of net income and a record-breaking AED 5.25 billion of net profits. Revenue growth was strong at 36% year- on- year and 7% quarter- on- quarter. The strong growth was backed by funded revenue growth of 47% as well as, I think one of the more important KPIs here is also our return equity, of 27.1%, which re-emphasizes again our ability to originate capital accretive business. One of the, I think, very important KPIs to call out is our cost to income ratio at 32.9%. If you just go back a couple of years, you would have seen that number in the high- 40s range.
Moving forward on slide 11, we are very pleased with the quality of the profits that we are delivering. As you can see on the top right chart, the key drivers of profit growth were 47% funded income and 18% increase in non-funded income. This was partially offset by growth in expenses, and where we're seeing AED 675 million growth and AED 60 million growth in Zakat as well. From a segmental perspective, retail and wholesale business and all other business contributed quite nicely to that growth. Moving forward, on the funded income side, as mentioned, funded income has grown 47% year- on- year. In terms of performance by segments, funded income improved across the board, aided by margin expansion from higher benchmark rates. The consolidation of ADIB Egypt also positively impacted funded income, and it's reflected in the line which we call Associates and Subs.
In terms of net profit margin, I believe that is probably also a question which will come up, just to call out our sensitivity. Latest calculation point to the fact that 50 basis points still give us a sensitivity up and down of AED 120 million impact on our net profits. Moving forward to slide 13, non-funded income. Non-funded income has grown 18% year-on-year. If we just look at the waterfall to the top right, we can see that a big component in the growth and non-funded income has been on fees and FX, which is very much talking to our strategy, where we are more and more focusing on generating higher growth and non-funded income, which will allow us to continue growing without putting undue pressure on our capital position as well as maintaining the high return equity which we have been reporting.
Moving forward, on the costs, again, I think this is really a cost story which we need to celebrate. We are heading very, very sustainably to, I would say, market-level cost to income ratios. The positive point which I need to call out is that we are benefiting from top-line growth, which has given us some of that lift. But under no circumstances we have stopped investing in our systems and people, and that is why you see that both employee costs as well as general costs have grown. That is a strategic direction for the bank to invest in our capabilities and to be able to support future growth as well. Okay, on the impairments. Again, if you look at the year-on-year, we have kept impairments relatively flat.
The story is that on the U.A.E. specifically, we have seen a slight reduction, and that is in line with the improvement in what we see in the external environment, but also our ability to have pushed over the years some of the exposures we have, which was offset by some increases we have seen in our Egypt franchise. But we have kept our impairment levels flat year-on-year, and hence our cost of risk has normalized to around the 49 basis point mark level, which is very much in line with the guidance we have also provided at the beginning of the year. Okay. Yeah, sorry, just one more. Yeah. NPAs. Is it NPA? Yeah. Yeah. This is a very important slide. It is, again, talking to what we have been signaling to the market over the last, I would say, 12 months- 18 months.
Our focus on enhancing our non-performing asset ratio has continued. We are reaching a 6.1% level from a high of 7.7% last year. How does it come about? It comes from two things. Number one, we are controlling the flow into our stage three position. So very strict underwriting standards, proactive measures to control any flow from stage two to stage three, and at the same time focusing on our legacy non-performing exposure, which has been coming off over the quarters, and hence we see that improvement and we are looking forward to further improvements in 2024 as well. At the same time, as we are also proactively writing off legacy exposures, we were able to protect our provision coverage ratio, which has shown improvement to 74% without collateral in the last quarter of the year, but also including collateral has moved up to 139%.
All KPIs really moving in the right direction. From an asset perspective, we have seen a growth year-on-year of 14%, in line with the growth in deposit as well as 14%. The customer financing has grown 7% on average, and that is above market norms. The latest numbers we've seen, I think, were trending towards 5%. It means that we have been able to take market share. The other increase you see there in cash and balances is predominantly a factor of the change in the reserve requirement, which moved up from 7%- 11% this year as well. From a financing perspective, you would see that we are normalizing just to give the market a true picture of the underlying growth.
While headlines show 6%, underlying is showing 8%, and the reason is that our Egypt franchise has grown, financing from a local currency perspective. But given the devaluation, it has taken away EGP 2 billion or so in Dirham terms. So underlying growth of 8%, headline growth of 6%, again, beating market consensus. If I just take a closer look at our retail book in specific, we are very happy to report that our three flagship products, whether it's home finance, personal finance, or auto finance, have equally grown around the AED 2 billion or AED 2.5 billion mark. That is a strategically important element to allow our customers to have a complete value proposition when they bank with ADIB and offering them all kind of products which suits their needs, whether it's auto, personal, or home finance. This is our investment or Sukuk portfolio.
In line with our strategic direction as well, we have grown the book from AED 19.4 billion- AED 25 billion, and that is driven by our aim to, first of all, explore opportunities, but also the investment book provides the bank with a natural hedge in an environment where rates are expected to reduce. Hence, building that book at a very timely manner by our treasury team has allowed us to create that natural hedge for longer, even if rates are starting to come off. From a deposit perspective, a healthy growth of 14%. The majority of growth has been contributed by our two flagship segments, which is in retail, AED 10 billion, as well as wholesale bank, AED 9 billion.
If one would look at which products they have contributed, you would see that around AED 9 billion has come from CASA accounts and AED 7 billion from Wakala. It is quite, I would say, a success story to be called out that in such high environment, you are still growing your CASA book by AED 8.7 billion, which is predominantly coming from the retail book. Hence, the contribution of the total deposits coming from very efficiently priced deposits is now 65%. I would like to believe that's probably one of the highest, if not the highest in the market. Last, but not least, our capital position. So we are reporting a CET1 of 12.2% and a total CAR of 16.8%.
This is after factoring in the proposed dividend of AED 0.71 per share, allowing us still enough room to create growth for the business in 2024 through internally generated income. The last slide we will talk about is our guidance. What are we saying? This year we've grown headline financing by 6%. We are maintaining a view early in the year between 5%-7%. We will continue reviewing that as we go through the year. But if I just look at the first 24 days in the year, it's a very promising pickup and driven by the strong close of Q4, giving us tailwind into 2024 as well. Net profit margin, we are maintaining at 4.5% in anticipation of some of the rate cuts we are expecting.
So we're not expecting that number to go down, but actually to remain flat. If rates reduction are being prolonged or decision is taken later in the year, we'll probably be able to adjust that number upwards. Cost of risk normalizing at today's level, so we are close at 49 basis points. Probably in 2024, we're looking at anywhere between 50 basis points-70 basis points. Our view is that probably we're going to be at the lower point of that range. Our cost-to-income ratio at 32.9%. At this stage, we are signaling that this number will continue to improve, and hence we are saying that below 32% is going to be probably the exit point for us. And return equity at 27.1%, we are saying that number will probably be maintained. So we're saying above 25% for the year.
Thank you, Mohamed. We've concluded the presentations, and now we will open the floor for some questions.
We'll now move to the Q&A section for this call. If you have joined by Zoom and you would like to ask a question, please use the raise hand button on the bottom of your screen. We've got several questions coming through. The first one is from [Shabbir]. [Shabbir], if you'd like to unmute yourself and ask your question.
Hi, can you hear me?
Yeah, we can hear you. Please go ahead. Yeah.
Hi, this is [Shabbir]. Just a couple of questions from my side. Just wanted to talk about the NIM expectation that you provided. How many rate cuts are you assuming in this guidance? And have you considered any scope for competitive pressures or changes in balance sheet mix to shape this NIM outlook? That is my first question. My second question is regarding your fee income, which seems to be pretty strong in the fourth quarter. Were there any non-recurring items, elements in the fee income this quarter that you can highlight? And maybe a third question on expenses, which look pretty strong. If you can break down the drivers of that and what is the best way of looking at expenses going into 2024? Is it going to be more or less in line with inflation or there is a growth element in there as well.
So maybe if you can talk about these three points. Thank you.
Sure. Happy to, [Shabbir], and thanks for the question. I will start with first, the net profit margin outlook. We are expecting 4.5% average, and what we are factoring in is that, I wouldn't say the number of cuts, but just let me know where probably the rates will end up. We are thinking maybe anywhere between 75 basis points to 1% could be the total impact of rate cuts in 2024. The timing, in our view, will probably be starting from half one onwards. That is the assumptions we have. Now, if that changes earlier or later, I think the impact will not be that material, given the structure of our balance sheet, and I will talk about it now in a second. Is that, if one would look at our financing book of around AED 115 billion, our retail book is predominated towards fixed pricing. Right?
It gives you that natural hedge for longer and will not be impacted immediately. The new vintages will be priced maybe at a lower rate, but again, sensitivity will not be that high. We have the Sukuk book, which is also long-term, which gives you that ammunition or that air cover as well. It is only the wholesale bank book which will price at the three months intervals, but it will take some time really to be felt. Now, the good thing on the funding side now is that our Wakala deposits, we will have the ability to mitigate some of maybe possible impact on the financing side, and hence, we will protect our corridor and be able to protect the profit margin as given the guidance for 4.5%. The second point, question you had on fee income. There were some spikes in fee. I wouldn't say they were one-offs.
In my view, they are maybe seasonal, but not one-off, and they are predominantly in the wealth management space. The campaigns we have been running over the last few quarters are clearly paying off. I think they are probably one of the best campaigns where we are mainly targeted to our retail clients of moving their banking relationship to ADIB. They have an opportunity to get back anywhere between 50%- 100% of their salary back. Hence, our cross-sell opportunity has really picked up in the last few quarters and given us a lot of fee uplift in that quarter as well. Our expense outlook.
The last quarter is a quarter which I think was on the higher side because a lot of catch-ups we have been doing in line with the high profitability, whether it is on some of our maybe incentive bonus accruals, it is linked to profitability, which is seeing in quarter four, as well as some of the digital delivery of products that happened in quarter four as well, which reflects in the form of depreciation and some of the AMCs or software costs. A guidance for this year in terms of cost, I would probably factor in inflation guidance, but nothing out of the usual, because whatever we have kind of wanted to do in terms of investment has happened, will continue at the same pace, but it will not create any huge increase towards what you have seen in 2023.
Probably inflationary adjustment would be a prudent way to look at it.
Great. Thank you.
Thank you, [Shabbir].
The next question comes from [Chiro]. [Chiro], if you would like to unmute yourself and ask your question.
Hi. [Chiro] here. Can you hear me?
Yeah, we can hear you. Please go ahead.
Yeah. Perfect. The first one is related to asset quality. It is quite evident that the asset quality continues to improve, but the NPL coverage, the pure cash one, the non-collateral part of it, seems to have stagnated. How should we see it? I mean, what should be your strategy going forward related to that? What would be a comfort level? I mean, at what level would you like to see this number, going forward? That is my first question. Second one is a little continuation on the margin side, which you just answered, is, as things looks, I mean, are you being a little conservative with your NIM guidance where you believe it to remain flattish? Because your retail book most likely will not, which is a big chunk of your loan book, will not get repriced, and it is at a much higher rate.
Your Wakala deposit also you can reprice. Just want to get a sense that, are you being a little conservative with your margin guidance? The third one is quickly on the, what is the tax rate which we should assume for 2024 onwards, considering there is a Zakat component as well as the corporate? Yeah. These are my three questions.
Sure. Happy to answer the question. Please let me know if I missed any of your points. On the provision coverage, the 74% is actually an improvement of what you see in the past few quarters. As you write off some of your legacy exposures, you lose some of that coverage as well, right? If you don't do anything, your coverage will go down with write-offs, but in fact, it has grown, which reflects that we actually prudently building some of these provisions as well. What is our comfort level? We are quite comfortable with that level. It will continue to improve, but it's important for us to continue looking at the coverage ratio, including collaterals as well, which has really improved quarter on quarter.
We do these assessment quite frequently to ensure that, with a 50% haircut on the collateral value, we still have a good cushion at the 139%. So that's on the coverage. On the net profit margins, when you say conservative, you expected the 4.5% to be higher or lower?
Yes, I expected, yeah, maybe on the slightly on the higher side. Or do you think that it might be a little higher because, remember in the last part you were saying that there are loans which have been disbursed at a much lower rate? And which will be lent right now at a slightly higher rate, on that context?
Yeah. No, I understand. No, I think could they be slightly higher? Not unreasonable to think about it, but the point which we need to consider is that you are at a cycle where your gross financing cost to your clients is quite high, right? While you could protect it for longer, we have to take into consideration market dynamics and competitive pressure in terms of ensuring that not all the increase continues to be passed on to your clients for too long. Hence, we are saying that we are happy at the level we are at now, and we will not be looking at increasing it any further. That's why the 4.5% at this stage seems to be quite reasonable for us as well. Yeah?
Handled.
Your last. Yeah, you had, the third question was.
Yeah, it was Zakat corporate tax. Yeah. The Zakat corporate tax.
Oh, yeah.
One question.
Sure. We think that the effective rate at this stage will be probably around 11%. As we go into Q1 and announce our numbers, we will obviously give you a much more accurate dynamic, because this is the first quarter we will report on corporate tax. But for now, I would factor in an 11% effective tax rate.
Just one quick follow-up on the first answer which you gave. So as collateral value goes up or say maybe real estate prices remain high, you will be a lot more comfortable with the 74% NPL coverage. Am I right in my understanding?
That is absolutely correct. And also, just to re-emphasize, we do not take the collateral valuation at face value. We actually take a haircut on it as well, right? So it is not because we understand there are time to sell, there is distressed sell, so there always usually can go up to a 50% haircut on the value you have taken on the collateral, which is predominantly real estate.
Okay. It is quite clear. Thank you very much.
Thank you.
Our next question comes from [Waleed]. [Waleed], if you would like to unmute yourself and ask your question.
Hi, good afternoon. Thank you much for the presentation and congratulations on the strong set of results. Three questions please from my side. First, just wanted to quickly confirm that the guidance that you provided for ROE for 2024, which is above 25%, the step down is mainly on account of the tax, right? Which you are incorporating, which is 11%. That is the delta between the two years. That is the first question. Second, I wanted to ask you about the retail book. I think in your answer to [Shabbir], you were talking about the difference between the back book and the front book. I just want to get a sense of where your retail back book is priced at this moment.
I understand rates obviously going down will impact the pricing of new origination, but I was just thinking that if your average duration of retail loans is, call it, two to three years, then something which was written at the end of 2021 was written off an interest rate, which is even below where the market expects rates to settle medium term. If you could just provide a little bit of clarity on the back book vs the front book pricing, that would be very helpful? My third question is on your asset quality. I wanted to get a sense of how much of the back book has been worked through by now. Any major legacy accounts which could come as a positive surprise. We saw it with one of the peer banks in their earnings earlier this week. Your thoughts on that will be helpful.
And linked to this, how are you managing Egypt risk at this moment? Given that in the parallel market, the Egyptian pound rate is significantly lower than where the official rate is. How are you going about managing Egypt risk in your book? Thank you.
Sure. Thank you. Thank you for the question. I will take them one- by- one. The question on ROE going to 25%, yeah, clearly an element of it would be tax, but because we are saying 25% and above, we are taking into consideration not only the tax impact, but you are also creating or enhancing your capital position. So naturally, as your capital goes up, your effective return might go down as well. I would not be surprised if we get closer to the number we have this year, but for now we are signaling at 25% and above in terms of ROE, which is for us, a really comfortable level and mainly driven by our ability to create, as I mentioned, the fee component and the capitalized business.
Even in your financing book, having your corporate book tilted towards GRE and public sector gives you a lot of capital relief, and in your retail book tilted towards home finance also gives you a huge capital relief as well. ROE, very happy with that, and it is one of our most important KPIs we look at. In terms of our retail book, I think you called it quite rightly, is that we are at a cycle where the financing originated at the lower point of the curve are now not on our books anymore, right? So we are benefiting from that, and hence, when I mentioned that as rates go down, some of your fixed price financing elements are giving you that natural hedge for maybe another, and that book specifically for another 2.5 years at least.
Now we need to look at the mix because you have also financing which are being priced more frequently. But that specific book is giving you a good hedge. To answer your question, yes, most of the lower priced advantages are now off our book now. In terms of the third question on Egypt, our Egypt franchise obviously is going through, not Egypt as a franchise, but Egypt as a country, has its challenges in terms of the FX availability and hence there is an official rate and there is probably another rate which is being dealt with. We are obviously doing a lot of stress testing to ensure that the impact on the U.A.E. franchise is mitigated. But it is important to put into context is that of our AED 193 billion balance sheet, our Egypt franchise is probably AED 15 billion or so in terms of dirham terms.
It constitutes a fairly small 7%- 7.5% of our total assets. Any shock, even in rates, we will be able to absorb, whether it is from a capital position as well as, from a balance sheet or a P&L perspective.
Got it. Thank you much.
Any follow-up?
Yes, just a couple of follow-ups, please. On capital, you talked about the capital buildup and obviously some of the benefit you get from secured lending on the retail side, and government lending. What levels of capital are you comfortable with? It seems that you would like to build up capital a little bit if I got that correctly. Any comments on that would be helpful. Regarding your first point about ROE could well be close to what you delivered in 2023, that number that you are talking about, that is a pre-tax ROE being close to 2023 number, right? Not on a post-tax basis.
That is correct. Let me take the second point first. You are correct, but you are also expecting growth and profitability as well, right? That will definitely help us. We cannot give you too much forward-looking view on that, but we are cautiously optimistic that our profitability will continue to grow as well. And your ability to grow profitability much faster than you are putting on RWA will eventually relieve capital pressure, but also give you a return and hopefully cover some of the tax impact as well. The first point you had, I think was on the Egypt point, right?
No, the ROE as you said. ROE, I was saying, and then the other one was the capital. Where would you like your capital to sit? Are you comfortable with current levels?
Yeah.
Or would you like to build up?
Very comfortable. I think at the levels where we are today, is a comfortable level to be in. And if there is clearly any difference, we will signal to the market. But CET1 and total CAR at these levels historically and today have been very comfortable levels for ADIB.
Got it. There was one question left on the asset quality back book. Is there anything on the legacy side which is pending, which could be a positive surprise this year?
I guess the short answer is yes, there are a few names which will give us hopefully some positive news and which we will signal to the market as and when they happen. Yes, there will be some positive news there.
That is not factored into your guidance of 50 basis points-70 basis points?
It will be mainly reflective of our NPA ratio more than a direct P&L impact.
Got it. Thank you so much, Mohamed. Thank you.
Thank you. Thanks.
Our next question comes from [Jagadishwar]. [Jagadishwar], if you would like to unmute yourself.
Hey, can you hear me?
Yeah, we can hear. Please go ahead.
Yeah. Hey, thanks a lot for taking my question. Congratulations and good set of numbers. I see your CASA deposits are going up and up every quarter compared to some of the other banks. What is contributing to this? Who are the end customers that is helping you improve CASA ratios? That is one thing. Second thing is, on this retail loan book being priced, all of your retail loan book repriced to the latest interest rates? Or you have any certain percentage of the loan book is not still priced into the higher interest rates? Can you help me understand that? These are the two questions from my end.
Sure. Happy to. The CASA growth is a factor of two things. One is the type of clients we have and the product offering as well. We are in a position whereby, we are receiving a lot of new clients into the bank, which are salary bank, which are usually also government officials, which are U.A.E. national. This free combination is the outcome of what you see there, coupled with very targeted campaigns to ensure that we are able to build CASA balances, but also benefit the clients. It is a two-way arrangement where the client sees the value of moving his relationship to ADIB, opening a long-term relationship with ADIB, and the added value they will get, not only from keeping CASA with us, but also from the fact that they will be able to benefit in other products and services as well.
Not to mention that some of the CASA, I did mention that it is predominantly retail, but there is also an element of some of the escrow accounts from our corporate relationships, particularly on the commercial real estate, which we have been able to onboard in 2023 as well. That really has helped us on that front as well. That was on the CASA. Your second question? Yeah.
What percentage of your loan book is not repriced yet, or is it fully repriced to the higher interest rates?
If I just split them into buckets, our wholesale bank book is on a frequent repricing, so that is taken care of immediately without any intervention. In our retail book, our personal finance book is usually a vintage of, I would say, take the entire book, right? Park home finance for a second, it is going to be on a 2.5 years repricing tenor as well. The home finance book, while it is longer term, its behavior life is usually shorter. You can take it from maybe five to six years, and hence majority of the book would have been repriced at that level. In addition to that, we also always embed a floor in our financing structure, whereby it never drops below a certain level.
We are now at the inflection point where the majority of the book is really enjoying from a better rate environment.
Okay. Okay, great. Thank you.
Our next question comes from [Aaron]. [Aaron], if you would like to unmute yourself.
One second, Paul. There is also Naresh Bilandani from JPMorgan. He is not able to raise his hand. If you can, for some reason, it is not working. The next one, let it be Naresh, okay? Go ahead.
Naresh, if you would like to unmute yourself.
Yes, please. Hi. Can you hear me?
Yeah, we can hear you. Please go ahead.
Okay, excellent. Hi, Mohamed, Lamia, Ahsan. Thank you very much. I appreciate the opportunity to ask question. A bunch of questions, please, from my side. One is, would you please be able to throw some color on the sensitivity that you provided for the net interest margin? If you can, please just throw some light on how should we think of such a sensitivity if we exclude Egypt from a franchise? I am trying to understand how the core U.A.E. book works in a declining interest rate environment. That is the first question. My second question is, if I go to your strategy slide, I think in one of the points that you mentioned, you mentioned establishing FI as a future growth engine. If you can please throw some further light on that, on what you effectively intend to do, why at this point, that would be great.
My third question is, if I assume deval in Egypt or in the Egyptian pound vs FX over the course of 2024, would you be please be able to throw some light on how does that affect your capital at this stage? My fourth and final question is, I know you are still not reporting the core Basel III liquidity ratios on LCR and NSFR. If you have done some excise on that, and if you can please confirm where do you stand on LCR and NSFR, that will be super useful. Thank you.
Thank you, Naresh. I will start with the first point, sensitivity on net profit margin. What we are saying is that, again, the 50 basis points is approximately AED 120 million sensitivity on our net profits. Egypt, just to give you some context, actually, Egypt has been a positive contribution to our net profit margin because of the high financing yields, in Egypt vs the funding cost. The funding cost is also high, but the corridor has been widening in Egypt much faster than in the U.A.E., hence it has been positive. But in the bigger context of it, Egypt being only 7.5% of our balance sheet, the movement on that specific front is not very high.
The second point on FI being called out as a strategic initiative, what we meant by that is that our FI proposition has been very successful in the markets which we are operating, and part of our expansion is to explore more markets where we could add value, in terms of our FI relationship and ADIB's establishment in the U.A.E. Our devaluation on capital, again, linking back to the Egypt point, is that, given that Egypt, its size relative to the group is not very big, is not going to be material. But we did disclose in our financial statements that we were impacted by approximately AED 200 million± in our capital CET1 in 2023 from the Egypt devaluation.
Now, if there is a further devaluation to be happening, and if you think about it, in 2023 on its own, there was quite a severe movement in rates from where we started till where we ended, and that was at AED 200 million. Assuming a replication of that will happen, then you could probably factor in another AED 200 million, and the sensitivity on our CET1 is probably anywhere between 17 basis points- 18 basis points on CET1 from that impact. As Ahsan is calling out, that also on the flip side, as devaluation happens, your risk-weighted assets from Egypt will also go down, giving you some cushion in terms of your capital ratios. The last point on, we do not disclose these numbers, and also the central bank is not reviewing them.
But for your benefit, our LCR today is at 250%, and our NSFR is currently at around 107%. These are not numbers the central bank reviews for ADIB by now, but these are numbers which we track internally.
Excellent. Thank you. That was very clear. Just one very quick follow-up. When you talk about the FIs Could you please just give a flavor of what the counterparties are in this business?
The FI is looking predominantly at the African markets, North Africa, also some of the Asian markets which fall in our risk appetite. In some of these markets, we already have some sort of relationship, but we're looking at extending that relationship given its success over the past few years.
Great. Thank you very much. I appreciate the replies. Thanks.
Thank you.
Our next question comes from [Aaron]. [Aaron], if you'd like to unmute yourself.
Hi. Thanks very much. Thanks a lot for taking the question. Thanks for doing the call, and congrats on a good set of numbers. Could we talk a little bit about the net interest margin near-term trends, please? I think on the slide you show the nine-month number and the full year number. Could you talk a little bit about the sequential change, please, from Q3 to Q4 net interest margin? Maybe break that down into yields and cost of funds. Then talking about the first one or two quarters of this year, if you were to see, say, stable interest rate environment, would you expect your NIMs to increase over the next one or two quarters in that scenario?
Yeah, sure thing. I think, Lamia, you have it on the screen there. Okay. What are the dynamics of how we see net profit margins evolving for ADIB? If you look at the full year numbers where our funding cost is at 2.09% and our gross yield at 6.78%, giving us this 4.5%. Just to put things into context, the U.A.E. on its own is probably funding cost closer to 1.4%. The rest is coming from our international businesses. To address your question, where we see the near-term net profit margin moving and hence the full year at 4.5%, I would like to believe that in Q1, and to some extent Q2, this number will improve because your exit point of Q4 of 2023 has been on the higher side.
Because the 4.5% is the average of the year, and the quarter four is kind of your peak point. This peak point will continue because you're resetting the clock now into 2024. That becomes your entry point. You would probably see a higher net profit margin in Q1 and Q2 before it tapers off in the second half of 2024, and hence, the average for the year will go back to 4.5%.
Thank you. Are you able to share-
Does that answer your question?
That is very helpful. Thank you. Are you able to share what the exit rate was for 2023?
Yeah, as I was saying, it was calling out, it is around 4.55%-4.57%.
That's great. Thank you. And similarly on your slide for cost of risk, you have a full year number, but not the Q4 number. Is that something you could also share, please?
Yeah. So the cost of risk, Lamia, if you can put the Yeah.
Yes. Yeah. So I think-
This one.
Yes. Yeah.
The cost of risk, on average, has been 49 basis points at the group level. The reason why it has, kind of, gone up and then gone down again is that we did have some curing of some of our legacy exposures, which is also then reflected in the reduction of our NPAs to 6.1% from quarter three, which was at the higher level. Hence, we believe that our normalized level will be slightly. We enter the year slightly lower because, again, the 49 basis points is the full year average. We will enter the year slightly lower, but as we aim to enhance our coverage ratios during the year, as we start seeing, maybe, some of the growth in some of the sectors, particularly in corporate, which are not GRE public sector, more on the mid-market, that will go up.
The average will probably still be around the 50 basis points with the top end of 70 basis points. I think the range will be closer to the 50 basis points.
That's great. Thank you. I think you made a comment in response to a previous question about RWA density. Are there any changes we should expect there this year?
We think that the RWA density will probably stay at the levels where we are today. The reason we are saying that is even as we go maybe in corporate slightly more to, I wouldn't say riskier, but more towards the large- corp, mid-corp in the ecosystem of the GREs which we are operating in. Some of the growth we expect on the retail side will be on the home finance side given the pickup on the property market. Usually, the RWA density in home finance is effective. I think around 35% of the financing is only RWA consumed. Hence, we believe that this ratio will be maintained.
That's great. Thanks very much. That was all from me.
Thank you.
Our next question comes from [Moussa]. [Moussa], if you would like to unmute yourself
Hello, can you hear me?
Yeah, we can hear you. Please go ahead.
Okay. Just one question. Is there any guidance on the payout ratio going forward?
Payout or dividends, you mean?
Yeah.
We don't usually give forward-looking. But usually what I always tell the market is that ADIB has been very consistent in its dividend policy. We don't give forward-looking statements, but I think if you look at the past few years, you would see the consistency in the way we are treating what we consider as the need for creating internal equity for future growth, vs what we would like to also give back to our shareholders in terms of cash. And this year, just for, again, a reminder, we did recommend a dividend payout ratio in terms of percentage of net profit of around 49.4% on average, which translates into AED 0.71 per share.
Thank you.
Lovely. The next question comes from [Fredrik]. [Fredrik], if you would like to unmute yourself.
Hi. Thank you so much for taking my question. I just have a quick question around your fee and commission income. When I look at your disclosure per segment, what it looks like that really drove the sequential increase this quarter was income from cards. The number that you have reported was AED 343 million, if I'm doing the math correctly here, which basically compares to the nine months of 2023 accumulated value of AED 360 million. And we saw something quite similar to that also happen in the fourth quarter of 2022. Last year, you actually reported AED 325 million above the nine months 2022 level of AED 235 million.
So if you could give me just some additional color here as to why this is happening and if it is something that we could expect going forward to always happen in the fourth quarter? Thank you.
Yeah, sure. I think when you look at non-funded income and particularly the waterfall we have there, it is important that you probably will have to take into consideration last year's Egypt consolidation. Because when we did the consolidation last year for Egypt, there was an element of recycling some of the FX losses into our P&L and then taking on some of the fee income. You would see the investment income was negative and FX positive. The delta between last year and this year is nothing but the impact of the Egypt consolidation from recycling the FX, which was on the balance sheet last year and had to be put in the P&L upon consolidation.
But normalizing for that, you would see that in FX income and its own fees and commission and investment income, all of them have grown in double digits and have contributed to that growth.
Okay. But looking at cards income specifically, do you have a sense on what could have driven such a large pickup? It is equivalent to the nine months of 2023 value. I was just trying to understand what could have happened there.
Yeah, very good point. I think, in ADIB, we are probably one of the highest spend numbers, in terms of cards, whether it's debit or credit card. These are, I think, numbers which are published maybe also by the issuers. Particularly this year, we've continued to increase our acquisition strategy. Our cards are considered to be flagship cards in the market, and hence that increase is reflective of the higher volumes and the higher cards issued. Just to give you some context, in terms of number of cards issued in 2023 vs 2022, we've grown that volume by almost 40%.
Super clear. Thank you very much.
Thank you.
Our final question comes from Ankit, if you'd like to unmute yourself.
Yeah. Thank you for the opportunity. This is Ankit Mittal from HSBC. I have just two questions. First is on capital ratios. I wanted to confirm if the consolidation of ADIB Egypt has been fully completed, in 2023 with respect to the risk-weighted assets. I think last year you mentioned that you are doing a phased consolidation of Egypt RWA. Just wanted a clarification on that. Secondly, on loan growth, are there any plans to tap markets like Saudi, to accelerate the loan growth? Like we have seen few banks tapping Saudi. Just wanted to understand your strategy here. Thank you. That's all from my side.
Thank you so much for the question. On your first question, yes, Egypt now is fully consolidated into U.A.E. books from all aspects, including its fully loaded RWA. The capital ratios you see here is a fully loaded number with Egypt. Nothing left in terms of phase consolidation. Again, the answer is yes, Saudi is a very important market to us. We already have a very calculated, healthy exposure to the Saudi market within our risk appetite, and I don't see that trend changing in any way. It is an important market for us. It links very nicely to the UAE and to our clients, so it creates that corridor between U.A.E. and Saudi, and we are very committed to continue investing and growing in the Saudi market as well.
Thank you. Very clear. That's all from my side.
That concludes the questions in the queue. I'll now hand back to Rahul.
Actually, Rahul from Citi. Mohamed, I have a couple of questions because we have a couple of minutes. Maybe I can take this opportunity. A quick one on the legacy exposures. We've heard from banks like yourself that being an Islamic bank, it's difficult to write off loans and legacy assets were being held on the book for a very long time. Just wanted to understand, what has changed that ADIB is able to now remove those legacy exposures from the book? Related to this, if you could please comment on NMC. Where do we stand on NMC now? Is it any way part of NPA now, or it is completely out of NPA? That would be very useful. Thank you.
Thanks. So, very good question. So, difficult but not impossible, right? So, we are able to write off, but all the reductions you see here are because you are clearing these legacy exposure. So, not by way of write off, but because of settlements and restructuring and final closure with some of these clients, whether it is in court or outside court. So, that is the main reduction you are seeing here. In terms of NMC, yes, NMC is now completely out of our NPA book. It has been taken to phase two as part of their plan for NMC, and you will not see any exposure in the NMC book as well, whether it is from a provision perspective or from a gross NPA perspective.
Understood. Thank you so much.
Thank you.
Thank you, Rahul and Paul, and thank you, everyone. If you have any follow-up questions, you can always email us or call us. Thank you, and hopefully, we will see you in the next quarter. Thank you very much.
Thank you.